Draghi keeps faith in gradual recovery as ECB cuts forecasts

European Central Bank President Mario Draghi stuck to his view that the euro region will gradually recover later this year even as officials trimmed their economic forecasts and considered cutting interest rates.

“Later in 2013 economic activity should gradually recover, supported by a strengthening global backdrop and our accommodative monetary policy stance,” Draghi told a press conference in Frankfurt after the ECB left its benchmark interest rate at 0.75%, a record low. While officials discussed cutting borrowing costs today, the “prevailing consensus was to leave the rates unchanged,” Draghi said.

Uncertainty caused by the stalemate in last month’s Italian election, where anti-austerity parties won more than half the vote, has renewed concern that the euro region may struggle to overcome the sovereign debt crisis and exit recession.

The ECB today predicted the 17-nation economy will shrink 0.5% this year, more than the 0.3% contraction forecast three months ago. The forecast for 2014 growth was reduced to 1% from 1.2%. The central bank also cut its 2014 inflation projection to 1.3% from 1.4%. It aims to keep inflation just below 2%.

Euro Omission

While risks to the economic outlook are on the downside, risks to the inflation outlook remain “broadly balanced,” Draghi said. Earlier, the Bank of England held its bond-purchase program at 375 billion pounds ($565 billion) and kept its key rate at 0.5%.

The euro climbed as Draghi spoke and traded at $1.3086 at 2:11 p.m. in Frankfurt compared with $1.3020 beforehand. While the euro has risen 8% since July, it has dropped about 4% since the start of February.

The ECB president omitted from his opening remarks a statement made last month that the euro’s appreciation posed a downside risk to inflation. The exchange rate is broadly in line with its long-term averages, he said later.

The yield on Germany’s benchmark 10-year government bond rose about three basis points to 1.49%.

Italian bond yields jumped after anti-austerity parties led by former Prime Minister Silvio Berlusconi and politician- turned-comedian Beppe Grillo won about 55% of the vote in last month’s election. That triggered concerns about a new wave of market turmoil across the euro region that would send bond yields surging from Rome to Madrid and Dublin.

Living in Democracies

“Markets understand that we live in democracies,” Draghi said, adding that overall, confidence is returning to the euro area. “Fragmentation is not worsening it’s actually improving, it’s receding” and the recovery path is “largely unchanged,” Draghi said.

The yield on Italy’s 10-year bond has dropped to 4.62% from 4.9% on Feb. 26. Spain’s 10-year yield has dropped to 4.90% from 5.37% in the same period.

The ECB’s monetary policy “will remain accommodative for as long as needed,” Draghi said.